Presentation on theme: "SUPPLY & DEMAND Non Sequitur by Wiley Miller MARKETS n Institution that brings together buyers (DEMAND) n and sellers (SUPPLY) of resources, goods and."— Presentation transcript:
SUPPLY & DEMAND
Non Sequitur by Wiley Miller
MARKETS n Institution that brings together buyers (DEMAND) n and sellers (SUPPLY) of resources, goods and services
DEMAND is n Amount of a good or service consumers are willing and able to buy n Major determinant of demand is PRICE n Amount of demand at each price is quantity n Quantity of demand at each price is shown in a Demand Schedule
DEMAND CURVE n P is the vertical axis n Qty of D is the horizontal axis n Demand Curve is downward sloping because: –Common sense (lower price = buy more) –Diminishing marginal utility (the more consumers buy, the less satisfaction they receive) –Income & Substitution Effects
INCOME & SUBSTITUTION n Income Effect – the lower price increases the purchasing power of consumers n Substitution Effect – lower price gives incentive to substitute this item for those that are relatively more expensive
Diminishing marginal utility : n Consuming successive units of a particular product yields less and less extra satisfaction – consumers will only buy additional units if the price is lowered. ( the more consumers buy, the less satisfaction they receive)
LAW OF DEMAND n Demand varies inversely with price n If Price goes up – Demand goes down Ex: luxury cars n If Price goes down – Demand goes up - Ex: clearance sale
NON-PRICE DETERMINANTS n PREFERENCES – based on popularity or trends by consumers n INCOME EFFECT – how much money consumers have available to spend n POPULATION CHANGES – how many consumers are in this market n EXPECTATIONS OF CONSUMERS – what consumers think will happen in the future that affects their actions NOW!!
NON-PRICE DETERMINANTS con t. n Elasticity of demand – how much demand changes to respond to changes in price –More elastic when goods are luxuries Ex: steak, diamonds, SUV –More inelastic when good is needed Ex: medicine (insulin), soap, milk
NON-PRICE DETERMINANTS con t. n Related Goods SUBSTITUTION EFFECT –As price increases for a good, demand for its substitute (chicken for beef; generic) goes up n COMPLEMENTARY GOODS –As price goes down for one good, demand for that good & its complement both go up –DVD player on sale but DVD bought for regular price
NON-PRICE DETERMINANTS n REMINDER: P I P E E R –Preference of consumers (popularity) –Income of consumers ($$ to spend) –Population (# of consumers) –Expectations for future (what to do NOW?) –Elasticity (effect of price) –Related Goods substitute available? price of complementary good changes- demand for both changes?
A little more on consumer expectations 1. Expect P to go up in the future = D>now 2. Expect P to down in the future = D< now 3. Expect income to > in near future = D > now 4. Expect income to < in near future = D < now Example: The news announces that the P of CD players will < next week. What does D do?
Substitutes (+ relationship) n If the P of steak >, then the d for chick > n If the P of steak <, then the d for chick < n Pepsi for Coke…………………..
Complementary goods: inverse relationship n If the price of flashlights goes up, then the Demand of batteries goes down. n If the price of flashlights decreases, then the D for batteries_______?
Be wary of independent goods. They have no effect on one another Like Chinese food and chocolate puddin
Hurry Lads – to the white boards!
Change in QD – caused by a CH in the P of the product under consideration now. 1. shown by moving from one point to another along a stable/fixed demand curve. 2. Caused by a change in the P of the product 3. The P of T-shirts >, :. QD <
Change in D n Caused by a CH in one or more of the non-price determinants of D (whats the acronym?)……………. n 1. The P of the product does not change now. n 2. Shown by shifting the Dcurve. n D> shift to the right n D< shift to the left
Draw a DC based on the D schedule below these stupid words. 20oz Red BullCans of 20oz Red Bull $ $ $ $ $ $ $
What do you do with D if the price moves from $.50 to $1.50?
n A news report has just surfaced that energy drinks will make you smarter, better looking and smell like sunshine.
n Three 4 year old kids drank Red Bull last night and tweeked so hard that they brains froze up like the laptops at Guyer.
n 20 oz Red Bull is selling for $2.00 per can. n The price of Monster just dropped to 1.00 per 20oz can.
SUPPLY is n Amount of a good or service producers are willing and able to sell n Major determinant of supply is PRICE n Amount of supply at each price is quantity n Amount of supply at each price is shown in a Supply Schedule
SUPPLY CURVE n Price is the vertical axis n Qty of supply is the horizontal axis n Supply Curve is upward sloping because: –Price and quantity supplied have a direct relation –Price is an incentive to the producer as they receive more revenue when more is sold
LAW OF SUPPLY n Supply varies directly with price n If Price goes up – Supply goes up n If Price goes down – Supply goes down
NON-PRICE DETERMINANTS n Cost of Production –Cost of producing goods & services –Ex: minimum wage for labor goes up –Ex: Natural disasters make costs go up n Expectations of producers –Predictions on how consumers will act n Resources that can be used to produce different goods –Corn instead of wheat
NON-PRICE DETERMINANTS n Technology –Improvements increase production n Taxes/Subsidies –Pay more tax which increases cost of production –Gov pays firm to produce n Suppliers (# of firms) REMINDER: C E R T T/S S
Book Version – page 48 Resource prices Technology Taxes and subsidies Prices of other goods Price expectations Number of sellers in the market
Shifts in Supply & Demand Curves n Increase - shifts to the right n Decrease - shifts to the left PRICE QUANTITY PRICE QUANTITY D 1 D 2 D 1 D 2
Shifts in Supply & Demand Curves n Increase - shifts to the right n Decrease - shifts to the left
Effects of Changes in both S&D page 53 in the book SDEq PEq Q ><< Indeterminate <>>Ind >>Ind> <
EQUILIBRIUM PRICE n Point where buyers and sellers are equally satisfied n Point where D & S curves intersect n Adam Smiths Invisible Hand Theory –Forces of S & D, competition & price make societies use resources efficiently
EQUILIBRIUM PRICE PRICE QUANTITY SUPPLY DEMAND E P EQ
Equilibrium n When supply = demand, there is equilibrium in the market n Equilibrium creates a single price and quantity for a good/service
Changes in equilibrium n When supply or demand changes, the equilibrium price and quantity change n If demand increases then price increases and quantity increases n If demand decreases then price decreases and quantity decreases n If supply increases then price decreases and quantity increases n If supply decreases then price increases and quantity decreases
P Q S D p q D1D1 p1p1 q 1 Increase in Demand D.: P & Q
P Q S D1D1 p1p1 q1q1 D p q Decrease in Demand D.: P & Q
P Q S D p q Increase in Supply S.: P & Q S1S1 p1p1 q1q1
P Q S D p q Decrease in Supply S.: P & Q S1S1 p1p1 q1q1
Simultaneous Changes in Supply and Demand n If supply and demand both increase then price is indeterminate, but quantity definitely increases n If supply and demand both decrease then price is indeterminate, but quantity definitely decreases
P Q S D p q Simultaneous Increase in Supply & Demand S & D.: P ? & Q S1S1 p1p1 q1q1 D1D1 q2q2
P Q S D p q Simultaneous Decrease in Supply & Demand S & D.: P ? & Q S1S1 p1p1 q1q1 D1D1 q2q2
Simultaneous Changes in Supply and Demand n If supply decreases while demand increases, then price definitely increases while quantity is indeterminate n If supply increases while demand decreases, then price definitely decreases while quantity is indeterminate
P Q S D p q Decrease in Supply w/ Simultaneous Increase in Demand S & D.: P & Q ? S1S1 p1p1 q1q1 D1D1 p2p2
P Q S D p q Increase in Supply w/ Simultaneous Decrease in Demand S & D.: P & Q? S1S1 p1p1 q1q1 D1D1 p2p2
Disequilibrium n If price occurs at some point where supply and demand are not =, then disequilibrium exists. n If the price is higher than the equilibrium price, then a surplus (Q s >Q D ) occurs n If the price is lower than the equilibrium price, then a shortage occurs (Q s
P Q S D pepe qeqe Market Disequilibrium (Price, p x, above Equilibrium Price, p e ) pxpx qsqs qdqd If price is p x, then q d < q s.: surplus exists (surplus = q s – q d )
P Q S D pepe qeqe qdqd qsqs If price is p x, then q s < q d.: shortage exists (shortage = q d – q s ) pxpx Market Disequilibrium (Price, p x, below Equilibrium Price, p e )
Causes of Disequilibrium n Price floor – a minimum price for a good/service or resource determined outside of the market –Ex. Minimum wage n Price ceiling – a maximum price for a good/service or resource determined outside of the market –Ex. Concert tickets sold by Ticket-master
P Q S D pepe qeqe Effective Price Floor (ex. Minimum wage in competitive unskilled labor market) p mw qsqs qdqd If price floor is effective, then q d < q s.: surplus labor exists
P Q S D pepe qeqe qdqd qsqs If price ceiling is effective then q s < q d.: ticket shortage exists ptpt Effective Price Ceiling (ex. Single price for admission to a popular concert )
SURPLUS n Supply is greater than demand at this price n Must adjust by lowering price to reach equilibrium supply demand SURPLUS D QtyS Qty P Q
Price Floors n Government sets minimum price –Price cant go lower –Causes surplus –Market cant adjust Ex: Minimum wage causes surplus of workers at set price
SHORTAGE n Demand is greater than supply at this price n Must adjust by increasing the price P Q S D SHORTAGE S QtyD Qty
Price Ceilings n Government sets maximum price –Price cant go higher –Causes shortage –Market cant adjust Ex: Rent controls, Price controls, Utility rates set by govt.
What else………… n Inferior goods - is a good that decreases in demand when consumer income rises n Superior goods - make up a larger proportion of consumption as income rises, and therefore are a type of normal good n Normal goods - are any goods for which demand increases when income increases and falls when income decreases but price remains constant n $ is not a productive resource – doesnt produce n Ppc – the origin n Ppc – perfectly shiftable
Conclusion n Markets work best when supply and demand determine the price of goods/services or resources. n When forces other than supply and demand determine the price of goods/services or resources, surpluses and shortages result. n Over time, the forces of supply and demand undermine artificial price controls –Ex. Black markets, ticket scalping, undocumented workers
Supply and Demand Curves conqui2.htm TIME TO PRACTICE GRAPHS!